James Smith, Economist at ING, points out that today’s Non-Manufacturing ISM report gives further ammunition to the current hawkish plan of the Federal Reserve.
“The latest ISM non-manufacturing survey came in at a very healthy 57.4 level, up from last month and is further evidence that the economy is returning to full speed after a blip in the first quarter.”
“This gives the Fed further ammunition to press ahead with its current hawkish hiking plan. But the real challenge still lies with inflation. Core PCE has fallen off a cliff recently, hitting 1.4% in June, and wage growth has also lost some traction of late. Whilst we agree with the Fed that both will ultimately recover – the former as temporary “idiosyncratic” factors wane and as labour market tightness increasingly results in skill shortages for the latter – this process will take time.”
“That means markets are likely to remain fairly sceptical about the Fed’s plan to deliver four more hikes by the end of 2018. That’s partly why we’re seeing the Fed increasingly cite other factors – chiefly “rich” asset valuations and an easing in financial conditions – as extra justification for rate hikes.”